CPPA use has risen sharply in Ireland in the last two years against a backdrop of price volatility and an increasing focus on the role corporates must play in reaching net zero, writes Robert Costello
A Corporate Power Purchase Agreement (CPPAs) is a long-term contract under which a corporate (offtaker) agrees to buy some or all of its electricity directly from a renewable energy generator.
There are two main types of CPPAs in Ireland:
- Financial (virtual) CPPA – this agreement acts as a financial hedge that enables the corporation to support renewable energy projects and secure a stable energy price without physically trading power.
- Physical CPPA – the corporate receives physical delivery of electricity from the generator, generally through the grid.
Benefits of CPPAs
The State’s climate action plan aims to reduce emissions by 51 percent by 2030 and deliver 80 percent renewable electricity by 2030. It includes a target of 15 percent of electricity demand to be delivered by CPPAs.
CPPAs offer an alternative route to market for generators who were excluded from the Renewable Electricity Support Scheme (RESS), were unsuccessful in RESS or for whom the terms and conditions are not commercially viable.
The long-term stable income that comes with a CPPA with a financially strong counterparty gives generators the financial certainty they need to secure debt funding to build new projects.
Meanwhile, corporates benefit due to:
- Budget certainty, particularly given volatile market prices;
- Delivering additionality – the renewable energy project would not have been built without the corporate's involvement (via the CPPA); and
- Guarantees of origin (GOs).
Key commercial considerations
When negotiating a CPPA, corporates must consider that CPPAs are typically long-term contracts (about 15 years), although some short-term contracts (less than five years) have been agreed in the Irish market in the past year.
The offtakers forecast energy needs to determine the size of the asset with which it can contract for some or all of the output.
There are four types of contract:
- pay-as-produced;
- shaped;
- baseload; and
- pay-as-consumed.
Pay-as-produced contracts are the least risky for developers (as generation is not fully predictable). Other forms of contract need a significant premium from the offtaker as the generator is taking the volume risk.
CPPAs can be fixed-priced, variable or a combination of both. Fixed pricing increases cash flow certainty for both parties, helping with budgeting, project financing and protecting margins.
However, it can expose offtakers if there are significant wholesale market price declines, as they are locked in at higher prices.
Fostering growth
CPPAs present a pathway to achieving Ireland’s ambitious climate action goals. By facilitating direct transactions between corporations and renewable energy generators, CPPAs not only contribute to decarbonisation efforts but also foster economic stability and growth.
However, navigating the complexities of CPPAs requires careful consideration of key commercial factors. From contract duration to pricing mechanisms, each element demands strategic planning to mitigate risks and maximise benefits for all stakeholders.
In essence, CPPAs represent more than just contractual agreements; they embody a collaborative approach towards a greener, more sustainable future.
By harnessing the collective power of corporates and renewable energy generators, Ireland can accelerate its journey to a low-carbon economy while fostering innovation and resilience in the energy sector.
Robert Costello is a Partner with PwC
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